Nigeria’s fiscal exposure to falling oil prices is amongst the most acute within the Opec group.
But as Standard Bank analysts note on Monday, whilst the country’s central bank has shown it is prepared to defend the currency ahead of all-important national elections in February, its ability to do so diminishes with every dollar that the Brent crude price loses:
The CBN is clearly struggling to balance constraining upside USD/NGN pressure with limiting the depletion of FX reserves. At present, the CBN is intervening in the interbank market just below the prevailing rate rather than protecting a line in the sand.
The CBN has also recently shifted the RDAS rate higher and we suspect may move it to the upper end of 155 +3% band in coming weeks.
Our core scenario remains that there will not be an official shift in the RDAS central rate until after the elections in Feb 15. The ability of the CBN to achieve such an outcome clearly diminishes, the lower the oil price goes.
Here’s a great chart from Emad Mostaque, a strategist at Ecstrat, a new research company set up by Mostaque and former head of EM strategy at Deutsche Bank John-Paul Smith:
When you look at things hard enough you realise almost everything in society can be reduced to a cartel, monopoly or perfect (and chaotically disruptive) competition model.
While cartels come in many shapes and forms, the purpose is common: stability.
In other words, as long as everyone plays by the rules of the cartel, what’s best for that particular participatory group can be guaranteed.
On which basis, government itself can be reduced to a cartel-type system. As can central banks. Read more
This little chart is becoming a major headache for the world’s biggest oil producers:
Russia geopolitical risk? Check. Middle East geopolitical risk? Check.
But commodity prices, and in particular oil prices, are doing nothing: Read more
The summer silly season is nearly upon us, so what chance a reprise of this Daily Mail classic?
From November 2009 when Britain’s tabloids met contango with predictable consequences: Read more
As we alluded to earlier, there is a battle taking place in the oil markets at the moment.
On one side there are conventional oil producers like Opec members desperate to stop oil prices from following the declining trajectory of the wider commodity complex. On the other side there are the new US shale oil producers, who — due to the US export ban — are unable to capture the full earnings potential of their production (on account of an inability to tap foreign bids directly).
The problem for Opec types is that the break-even rates they seek to defend are now too high to prevent the new class of producer from being incentivised to keep producing. This despite the fact that the export bottleneck only ends up transferring much of the profitability to the refining sector instead of the US producer. Read more
A picture, they say, is worth a thousand words. The same applies to some charts.
From the IEA’s latest market report on Wednesday:
The WTI-Brent spread is at a record wide of almost $20 per barrel. This isn’t, of course, what was supposed to happen.
As JBC Energy wrote on Thursday: Read more
Oil prices continue to decline, with WTI currently leading the charge:
The fixed income team at Credit Suisse have a good note talking about what’s really driving WTI backwardation. Small hint, they don’t think it’s much to do with Egypt.
They put the backwardation down to three things. Read more
A while back we talked about the anomaly of backwardated curves amid a veritable abundance of US and global inventory.
Or more specifically, the irony that prices were falling even as curves were implying backwardation (usually a bullish signal reflective of tight supply). Read more
Lots of commentary is linking the mini-surge in WTI overnight, and subsequent WTI-Brent compression, to events in Egypt.
But it’s probably much more related to a shift in interest-rate expectations than anything to do with Middle Eastern tensions. Read more
… and it’s all because, the lady loves shale oil.
Well, what we mean is that finally, the surplus stock of crude trapped in America is having a price effect beyond borders because logistical constraints have been removed and storage incentives have started to disappear. Also, because graphs like these can no longer be ignored.
The result: a major narrowing in the WTI-Brent spread. Read more
Home of oil sands, maple syrup, ice hockey, singing astronauts, William Shatner, the Bank of England’s governor-to-be and (rather poignantly) a lot of bears… Read more
John Kemp at Reuters has been following the interesting case of light sweet fatigue in the oil market.
As he first noted on Tuesday, a surge in shale oil production alongside a big increase in modern refinery capacity is increasingly undermining the value of sweet crude in the market. Read more
WTI crude prices are on the rise, but only at the expense of Brent’s premium. The spread between the two crude grades shrank below $8 this week, its lowest since January 2011.
But what’s really striking is the rise in US crude output, which has risen 57,000 barrels a day to 7.37m — its highest level since February 1992.
If one chart speaks a thousand words in this regard, it’s the following one from the American Enterprise Institute’s Carpe Diem’s blog, charting data from the US Department of Energy:
The number of cargoes that go towards determining the Dated Brent price is rising.
As Reuters reported on Thursday:
At least nine May cargoes have moved up the North Sea Forties crude programme after stronger-than-expected output from Britain’s Buzzard oilfield, the biggest contributor to the Forties stream.
According to the EIA, the definition of “spot market” is:
The price for a one-time open market transaction for immediate delivery of a specific quantity of product at a specific location where the commodity is purchased “on the spot” at current market rates. Read more
From Capital Economics on Friday:
At the time of writing (Friday afternoon in the UK), equity and commodity prices and government bond yields are all falling sharply. This appears to be in response to weaker-than-anticipated US data on retail sales and consumer confidence (discussed further below). If so, this is probably an overreaction, as the figures were hardly disastrous. The falls in the prices of riskier assets may also have been exaggerated by week-end position squaring after the Bank of Japan-inspired rally in the previous days.
Nonetheless, most of these moves are consistent with our long-held view that a disappointing global recovery will cause the equity market rally to run out of steam, the prices of industrial commodities to fall further (with Brent crude in particular heading back below $100) and 10-year US Treasury yields to dip to 1.5% or so by year-end. The pick-up in market volatility more generally is something that we had been anticipating too.
Something is fundamentally changing in the oil market. To explain, consider the following.
The first chart for your consideration is the current Brent price (a reasonably large fall this week): Read more
An excellent observation from John Kemp over at Reuters on Tuesday regarding the spot/forward disconnect we’ve been talking about:
The increasingly close linkage between hedge funds and spot prices since 2010 has also coincided with a sharp reduction in the correlation between front-month and far-forward prices. Correlation between spot month and forward prices, generally above 90 percent until 2010, is now often less than 50 percent (Charts 5-6). Read more
This is a follow up to Thursday’s post about Rosneft’s 500 million barrel collateralised financing (to raise money for its purchase of BNP-TNK) and how the market managed to absorb it almost without any price impact.
Most of the previous post was based on the observations of Philip. K. Verleger, who believed the latter point represented a triumph for the futures markets, which had reached a whole new level of maturity.
And yet, as we have been reporting, it’s always more important to look to the curve. Spot price, or “flat price” as traders like to call it, is almost irrelevant. What’s happening in so-called time-spreads is usually much more critical. (And yes, nobody usually takes unhedged positions on flat price.) Read more
Some excellent market commentary from Olivier Jakob at Petromatrix on Friday morning regarding the current state of oil market (dis)equilibrium and the potentially precarious position of Saudi Arabia. Read more
People are still scratching their heads over what possibly sparked crude oil’s sell-off in the middle the US trading day on Monday.
Explanations in contention include: fat fingers, SPR talk and general illiquidity due to the Jewish New Year. Read more
Brent crude, tumbling at pixel. (The USO fund too.)
Did anyone notice how the Brent slump seemed to come to a dramatic halt around June?
China buys two North Sea oil fields on the same day. Coincidence — or a sign of change coming to the oil market’s biggest benchmark?
In addition to Sinopec’s $1.5bn acquisition of a stake in Talisman… Cnooc’s $15bn play for Canada’s Nexen (at a 61 per cent premium to the share price!) might give the state offshore oil company a major bridgehead into the setting of the Brent crude price. Read more
Late last Friday afternoon, WTI crude futures experienced one of their sharpest price increases since the Libya crisis of last year: